Wealth management is a complex world, one that investors often learn about in a piecemeal fashion as they add more and more to their understanding. Some of the terminology used is common to the entire financial sector, but others are more difficult and require explanation. Knowing what the following lesser-used terms mean can help improve your overall wealth management credentials, allow you to understand your broker or advisor more, and better evaluate the quality of deals on offer. The most important terms refer to financial planning and managing money through different life stages, taxes, and the different taxation regimes for investors, and the markets themselves, especially index and tracking fund terminology. Since these principles make up the building blocks of financial planning, it is essential that investors get to grips with them so they can enter the market confidently.
Accumulation phase
This refers to the period when individuals or families are adding to their portfolios. Saving some of their income every month that exceeds expenses. This phase takes up much of the average client’s working life. It is their actions here that determine how well-funded their eventual retirement portfolio will be. Investors in this phase will still sometimes make withdrawals As in the cases of financial emergencies such as losing a job, or major purchases like a house or a new car, but the general trend is to save money for future investment. In this period investments will tend to be equities heavy. This is because the investor is less time sensitive and more interested in capital accumulation than protection.
Capital gains
Capital gains are the profits received when an asset is sold for more than its purchase cost – for example, if you buy an apartment for $500,000 and sell it for $700,000 five years later, you benefit from capital gains of $200,000. In some jurisdictions, capital gains are liable to direct taxation, which can make the sale of assets problematic. Tax-efficient investments help clients negotiate capital gains regimes by investing in different countries, or by using favored assets that are not liable to the same taxes.
Wealthcare
Wealth management includes a host of services, and recently some firms have aimed to provide more personalized service. Instead of simply focusing on investment and trade execution look at the portfolio and life of the client holistically. They also take into account more factors than a simple market trading platform. Wealthcare apps and services aim to provide budgeting, debt and credit planning, and insurance. This also includes market-based wealth management services in one place. This is done by looking at the overall financial health of the client instead of simply focusing on their portfolio. Wealthcare still includes a lot of traditional portfolio management and of course the buying and selling of securities. However, it aims to reach conclusions about the best portfolio composition with more information than a simple risk appetite survey or just looking at the client’s age.
Portfolio rebalancing
Portfolio rebalancing refers to actions taken to ensure a portfolio or fund is still aligned to its original remit and can take place in both personal finance and institutional investing context. An example of the latter would be a tracker fund that replicated the S&P500 buying the shares of a company that has newly been added to the index. The former could include a ‘risk averse’ investor whose portfolio is mostly in bonds, but who has seen the equities portion of their portfolio balloon in value during a bull market and needs to rebalance by selling stocks and buying debt instruments.
Portfolio rebalancing is important to ensure your funds continue to follow the original, agreed remit, but can present a problem since any buying or selling of securities involves paying fees. Fees eat into overall portfolio performance and excessive trading or shuffling of assets will destroy your overall performance.
Index replication
Passive investments have gradually become some of the most important assets in client portfolios, largely driven by their low costs. Investors in passive index tracking funds, whether they be ETFs or mutual funds, hope to replicate the performance of an index by buying a proportionate version of its contents. For example, a passive fund that tracks the S&P500 would hold the 500 companies that make up that index in proportion to their market capitalization, in theory ensuring investors receive the same return as the headline S&P500 number.
In practice, this is often not the case, for various reasons. Firstly, it takes continual and considerable rebalancing to keep an investment portfolio in line with the wider index. Eventually, managers who overtrade, or who receive poor rates from their counterparties. This will start to lag the overall index via the cost of fees. If they fail to rebalance regularly, they might start to deviate from the index. This is due to the components of the portfolio and index are not balanced. In some cases, they may even include different stocks, since companies are often added or removed from indices.
Therefore portfolio managers at tracker funds have the difficult challenge of balancing accurate portfolio composition with the perils of overtrading. Most tend towards the latter when there are failures in index replication it is normally. This is because fees eat in slightly, which is then compounded by the additional fees paid by the client to buy the fund.
Conclusion
Wealth management is a complex topic, touching on all aspects of investment, and financial planning. It is the host of personal and demographic information such as age, life goals, and income. The terminology of the industry is complex and ever-changing as new products are developed. This includes new investment styles coming into vogue, and older methods becoming defunct. Navigating your way through this mess of financial information. Some of it is profoundly unhelpful and can be very difficult. Identifying and understanding key terms about taxation, market performance and Wealthcare / financial planning is essential. You can follow your wealth management objectives with greater confidence. You can more critically assess proposals given to you by clients.
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